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Why the A2 Milk share price jumped 11% yesterday

The share price of A2 Milk Company Ltd (ASX: A2M) rose 11% after holding its annual general meeting (AGM) yesterday.

A2 Milk gave a trading update within the AGM presentation. In New Zealand dollar terms for all the stated numbers below, the company revealed that its China label infant nutrition revenue is forecast to be approximately $135 million representing growth of 84%.

Cross border e-commerce sales are forecast to be around $155 million which would mean growth of 54%.

Australia and New Zealand English label infant nutrition sales are forecast to be approximately $350 million which would represent growth of 9%.

US sales are forecast to be approximately $27 million which would be growth of 110%. Australia fresh milk sales are forecast to be $75 million and that would be growth of approximately 12%.

Overall, revenue is expected to be in the range of $780 million to $800 million which would be growth of between 27.2% to 30.5% compared to last year.

Not only is revenue going up at a good pace, but earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be better than expected.

The company has been focusing on maintaining an attractive EBITDA margin whilst still investing in marketing and other initiatives. The FY20 EBITDA margin is expected to be in the range of 29% to 30%, with the half year EBITDA margin expected to be between 31% to 32%.

A2 Milk expects to spend around $200 million to take advantage of the large opportunities in the US and China.

The company also announced an extension of its supply agreement with Synlait Milk Ltd (ASX: SM1).

Foolish takeaway

A2 Milk continues to generate strong growth despite the issue of size and the competition. It’s a high-quality business but I think the short-term opportunity is now gone, however I think it’s still one of the better opportunities on the ASX.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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